AS the nation awaits the new helmsman at the Central Bank of Nigeria to be confirmed, there are anxieties over the monetary and fiscal policies that will be pursued by the apex bank during his tenure. The fears are predicated on what successive apex bank governors did: discontinue with the policies of their predecessors. While it is uncertain if there won't be policy change, what is important is whatever the monetary and fiscal policies change might be, the bank consolidation needs to be sustained and not reversed.
Already, the global economic recession currently being experienced across the world is now common knowledge. The financial sector has been one of the most affected, especially the banking industry. In the UK, the recession has led to increased exit of banks through mergers and acquisition (M&A), public bailouts, and outright liquidations. In most cases, M&As and emergency bailouts have been accompanied by redundancies in the work force.
It is no exception that the Nigerian banking industry may be feeling the heat of the global economic recession. However, the industry has not collapsed up till now, at least not in the short-run. There have been no emergency bailouts either, though there have been reports of potential redundancies in the banking industry. An important component of bank consolidation in Nigeria was the recapitalization of banks in which a minimum shareholders fund of N25 billion was prescribed to be met. Towards this end, the Central Bank of Nigeria (CBN) encouraged banks to enter into M&As and provided range of incentives to assist weaker and problem banks in the exit process.
The CBN incentive provision was based on the view that this special forbearance to weaker and problem banks would improve their attractiveness to potential acquirers/investors, thereby preventing bank mass liquidation or failures and potential losses by the financial system. At end of the programme, the number of banks operating in Nigeria reduced significantly from 89 to 25. Nineteen banks emerged from M&A involving 70 banks and six banks remained as stand-alone banks. The remaining 13 banks did not scale through (or failed).
The Nigeria banking consolidation exercise represents an unprecedented change in institutional context in which bank M&A and failures occur. The exit process in the Nigerian exercise was induced as part of an overall sectoral reform policy. It was a regulatory policy-induced bank consolidation accompanied by a framework of facilitating incentives that permit banks to exit the industry through either M&A or failure.
This differs markedly from the convention in which bank M&A and failures result from voluntary decisions of the affected banks. The range of incentives provided by the CBN to assist banks in the exit process differs from the commonly observed situations where the regulatory authority merely approves the M&A decisions or liquidates failed banks.
Generally, the NBCP had been adjudged a success. The programme significantly improved the capital base of the Nigerian banking industry. The emerging 25 banks jointly accounted for about 93.5 per cent of the total industry deposit, while the remaining 13 failed banks jointly accounted for the rest (6.5 per cent).Thus, the impact on the financial system was minimal. Also, the programme improved investor confidence and repositioned the industry in its role of enhancing economic growth and development of the country. In the face of the current economic recession however, a counterfactual question that comes to mind is what would have happened had the CBN not implemented the NBCP at the time it did? Put differently; whether the stated benefits of the NBCP would have been achievable under the current economic recession.
The above point highlights the importance of timing of implementation of the consolidation programme. The timing of implementation is a key element in policy making. The timing of implementation of a policy can impact on the effectiveness and overall outcome of policy. With the strongest economy in recession and reputable financial institutions going to government cap in hand, banks in Nigeria would have collapsed. The peculiarities of our system would have accentuated run on the few banks that may survive.
The generally held view that the programme was intended to prevent bank mass failures (i.e. meeting the CBN capitalisation requirement) is now obvious. The prevailing macroeconomic conditions in the country and industry-specific factors tend to impact M&A decision of banks, with attendant effect on the extent of bank failures. The NBCP took place at a period of lending boom, which coupled with CBN incentive provision to weak and problem banks, accelerated M&A decisions, thereby reducing mass bank failures.
In the absence of the bank consolidation, one way by which banks would have responded to the current economic recession is by cutting back on lending, which in turn would have had severe multiplier effects elsewhere in the economy. Interbank lending would have declined significantly, with attendant effect on investments in the private sector. In the face of imminent bank mass failures, M&A provides alternative exit mode for inefficient and undercapitalised banks. However, implementation of the consolidation exercise during a period of business cycles as in current recession would have delayed M&A decisions, thereby increasing bank failures and greater burden on the financial system. No amount of forbearance to banks would have saved the industry from a complete collapse.
Whatever the monetary and fiscal policies of incoming CBN head might be, the present bank consolidation must be sustained. Should it be toyed with and consequently revert back to pre-consolidation era, it will be difficult for local banks to get fresh credit lines or have the existing one extended by their foreign counterparts. This is hinged on the fact that foreign partners will have to take some time to analyse local banks financial strength and what might become of fresh credit lines.
The interplay of macroeconomic conditions and industry-specific factors should inform policy on conditions conducive to implementation of any reform agenda generally, especially those affecting the financial sector. The fact that the Nigerian banking industry has not collapsed by now, even in the face of the free-fall in their stocks, is an indication that the implementation of the NBCP was timely and served the role of a preventive measure against potential collapse of the banking industry. The foresight and judgment exhibited by the policy makers at the CBN should be commended.
Dr. Olajide is with University of Aberdeen, UK and a Senior Fellow of Initiative for Public Policy Analysis, Lagos.